The Uptick Rule

Bankers have been debating bringing back the uptick rule for months, if not years. This week the debate made it to Capitol Hill. Senior Editor Paddy Hirsch gives a quick and dirty explanation of what the uptick rule is, and why it could be reinstated to turn the American taxpayer into one of Citigroup's biggest stockholders. Senior Editor Paddy Hirsch explains.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Of course, it is a fake name. I am unemployed, oh excuse me, in career transition, and have to be paranoid. So Paddy, I think Richard Quest at CNN International stole your idea on uncorking CDOs and didn't credit you and that royally pisses me off! Plus he used it in reference to quantitative easing, which makes no sense. You have fans watching out for you. I love your whiteboards! Keep up the fantastic work!

HI Alejandro
It doesn't matter what the price was when Jack borrowed it. Could have been $2, could have been $10. Diane's business is lending stock out to short sellers like Jack: in return, she gets a fee and some collateral, which she might invest elsewhere until the share is returned. So having money "sucked out" of her shares is just a cost of doing business for her.
To answer your second question: when Jack sells his stock, he does so at the market price.
And this might interest you, by the way. We discovered today that AIG lost more than $43 billion in its securities lending business. In other words, they had a business like Diane's. They lent shares and other stuff to short-sellers and invested the collateral to make money. Usually most securities lenders people invest collateral in safe securities like Treasuries. AIG invested collateral in, you guessed it, toxic waste. And when the value of that waste dropped to, well, nothing, it had to liquidate other holdings to pay that collateral back.
Pretty smart, huh?

a few details you left out.

what was the price of the stock when jack 'borrowed' it from diane?

did jack sell the stock at what it was actually 'worth' at the time or for less?

we know how poor old greg fared, did diane suffer as well. im not sure i would appreciate you giving me back my stock after you 'sucked' a dollar out of it for yourself. = )

good presentation
nicely explaind

In my admittedly uninformed opinion, it seems to me at first glance that the Uptick Rule would induce a sort of feast-or-famine effect. Whereas now, we have the danger of a vicious cycle being induced by all the short-sellers piling-on at once as a stock declines, with the uptick rule it seems that we might get more intense pile-ons at each uptick in a steady decline. The question remains: would the net-result be better, worse, or about the same?


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